Feb
09

The pesky political economics of the payroll tax

By · Published in 2011

For the past few months, I’ve been enmeshed in the MTA’s finances stretching back to 1970, and I can see now why politicians have such a tenuous grasp on how the authority is funded. The MTA is made up of various constituent agencies that each operate essentially for 24 hours a day, seven days a week. It has a massive payroll, an extensive operating budget and a separate capital budget. For state legislators who must balance competing demands, understanding this financial structure isn’t — and probably shouldn’t be — a top priority.

Yet, yesterday, while watching MTA CEO and Chair Jay Walder respond to questions from the State Senate Transportation Committee, I was reminded again just how poorly Senators understand how their own actions impact the MTA and downstate regional transportation. Throughout the committee hearing, the State Senators repeatedly spoke out against the payroll mobility tax. It’s somewhat odd that these representatives chose a hearing with Walder to attack the tax because Walder wasn’t even in the United States when the tax was approved as part of the funding package. Plus, the Senate — and not the MTA — was the driving force behind the tax, and if anything, they should debate amongst themselves the best way to fund transit. But I digress.

As the hearing wore on, the Senators ramped up the rhetoric. One from Long Island called it a “draconian” measure that has allegedly crippled the downstate economy. Another wondered why the MTA is so adamant about the millions generated by the tax now if, three years ago, it operated perfectly fine without one. “We didn’t have a payroll tax a few years ago. Why can’t we go back to that?” asked one Senator who later said that it “may be difficult” for the state to replace the $1.4 billion the tax generates.

Walder was unequivocal in his statement in response. “It would be impossible for the MTA to replace $1.4 billion,” he said. He calmly and forcefully explained that the service cuts instituting in June saved the MTA $100 million while the fare hikes raised another $350 million and internal belt-tightening led to $500 million in recurring savings. To go through that process again would hinder the authority’s ability to deliver the subway service its riders demand, and it can’t raise fares 33 percent to cover a potential billion-dollar operating gap.

So why do these myths that the MTA could do without the payroll tax persist? It is in fact a myth of Albany’s making. The reason why the MTA saw its operations budget deficit jump precipitously toward the end of the last decade is debt. As Albany scaled back its direct contributions to the MTA’s capital plan, the authority turned to bond financing instead, and the repayments started coming due. Thus, debt service payments jumped into the $1-$2 billion range, and the MTA had to scramble to pay for both the transportation services is must provide and the debt service it is contractually obligated to repay.

State Senators seem to have a myopic view of MTA financing. If it worked three years ago, why can’t it work today? The problem is that MTA’s economic obligations have increased because of Albany action from decades ago. When past leader try to make future generations pay for their capital work, the bill will eventually come due, and that’s what our current Senators don’t seem to understand.

To take away the payroll tax would starve the MTA of funds it needs to operate. Albany could find other funding mechanisms, but it now must lay in the bed it made. The MTA didn’t ask for this exact tax, but it needs the money. Anyone have a better solution?



Categories : MTA Economics

55 Responses to “The pesky political economics of the payroll tax”

  1. pea-jay says:

    “We didn’t have a payroll tax a few years ago. Why can’t we go back to that?”

    Care to create another housing bubble for us then. Real estate-related taxes was the reason why the MTA was so flush then. Woulda been nice to sock that away…

    “Anyone have a better solution?”

    Congestion Pricing. I’d love for them to dispense with the payroll tax altogether and replace it with a stiff congestion based-tax

    • Billy G says:

      Make the users pay for the system.

      The payroll tax is grossly unfair to those that don’t use public transportation. It becomes a perverse inducement to use a system that already has capacity issues.

      Raise the fares!

      Congestion Pricing is just more theft from the working class that has to transport items that cannot be brought onto public transportation.

      • This is simplicity as its finest. Beyond the fact that these mythical middle class drivers who are constantly going into and out of Manhattan’s Central Business District don’t exist and the sheer absurdity of calling a fee for the use of roads theft, you do realize that even those people who don’t make personal use of mass transit benefit on a daily basis, right? If the MTA were to, say, cut back service on the LIRR, everyone – and not just those who commute to the city – would lose. Property values would plummet, and the economy on the Island would be in tatters. Making the users cover 100 percent of the costs is just not a feasible, practical or fair solution.

        • pea-jay says:

          especially since drivers don’t pay for the full cost of driving
          come to think of it, aviation is another area that hasnt paid for itself either.

          In any case, I could care less about the cost to drive a car. I don’t drive. I rather have a well funded transit system. That’s what I care about come election time. Now where is my Transit Political Action Committee?? The car lobby has one.

      • Jason says:

        The system wouldn’t have capacity issues if funding was distributed just a little bit more fairly. Our subway and commuter rail systems would be the envy of the world if we funded them with at least 50% of what our road networks get.

      • MaximusNYC says:

        Billy, how would you like to have millions more commuters sharing the road with you? Sound annoying? Then pay your taxes and be grateful for a public transit system that makes the roads you drive far, far less crowded.

  2. Larry Littlefield says:

    I have two suggestions:

    1) Bankruptcy. Stiff some affluent bondholders, like everyone else did during the recession, and make the TWU give back the 2000 retroactive pension enhancement. Or:

    2) A series of steps.

    a) Start taxing Social Security and retirement income on the same basis as other income, rather than not at all, and use the proceeds to pay back some of the debts Generation Greed ran up.

    Implement a massive “exit tax” on residential real estate sales (a big transaction tax that is refundable if you buy something else) if case they try to flee their debts by moving elsewhere.

    c) Make the fare cover the “auto equivalent” cost of the subway and commuter railroads — the cost of buying, maintaining (Car Equipment department), and operating (Rapid Transit Operations) the cars and collecting fares. (Not the rail infrastructure, which is the equivalent of streets, and the stations, which are the equivalent of public buildings).

    Bus fares could be lower. Bicycles are free. The minimum wage in Manhattan south of 110th Street could be increased to make up for the cost for the most powerless workers. And the city and counties could buy fares from the MTA at full price and sell them for a discount if it wanted to subsidize a particular group.

    If the commuter railroads couldn’t hack it, let them go under and then after a while try to restart them or contract them out.

    d) Remove buses from the MTA’s purview, turning the buses and depots over to New York City and the counties. Each would be allowed to keep the payroll tax to subsidize buses, if they wanted to. As for free transfers, the new bus agencies could be allowed to use MTA fare media for a fee, but in a free transfer the fare paid would count as subway/MTA revenues.

    e) Eliminate half fare discounts for seniors at rush hours. The federal government only requires this during off peak hours.

    • Larry Littlefield says:

      Also,

      f) Congestion pricing so transferred toll revenues in excess of bridge and tunnel maintenance costs would be sufficient to maintain the subway and commuter rail infrastructure.

      I’d consider rent paid to transit riders for ceding their equal right to limited space on the road.

      g) Make local governments pay for station maintenance. Including NYC. You want two station agents per local station? Pay for it.

    • Eric F. says:

      “Bankruptcy. Stiff some affluent bondholders”

      This will become the left’s clarion call pretty soon. They will go from the current indignancy at the mention of the term, to noting how it’s unfair that we pay “affluent bondholders” rather than public workers and fund schools and the like. Tough nut for the MTA to crack since it will never be able to fund capital projects on a pay go basis, and not sure who you float bonds to after you just sneeringly stiffed former bond holders. The problem is that when you need $X billion to build something you generally need affluent people to lend you money. Poor people just seem less willing to fork over the needed billions for some reason. It’s almost like you need a source of capital, perhaps called a “capitalist”, if you were to define the person by what she owns in order to improve society. Just thinking out loud here.

      • Larry Littlefield says:

        “Tough nut for the MTA to crack since it will never be able to fund capital projects on a pay go basis.”

        So they will keep going deeper and deeper into debt forever? They probably could have paid on a pay as you go basis. Paying as you go plus interest on past debts — that they can’t do.

        • Eric F. says:

          Even companies that are highly profitable carry debt to fund cap ex. There is nothing sinister about carrying serviceable debt for long-term cap ex funding. But, right, if the plan is to never borrow again I suppose stiffing the bondholders may be viable, assuming they don’t get to repossess the transit system.

          • Eric F. says:

            Two other things:

            “And the city and counties could buy fares from the MTA at full price and sell them for a discount if it wanted to subsidize a particular group.”

            YES!!! THAT is how you do it. Much more efficient than subsidizing everyone’s ride.

            Also, the “exit tax” idea is, I hope to the Lord above, utterly unconstitutional. The Court has gutted that wonderful document, but I’d hope we’d still have full rights of interstate travel. Although I suppose 5 libs could ignore that right if it meant further taxing us back into the stone age.

          • Bolwerk says:

            I took Larry to be somewhat kidding, however I agree with you more or less: no, it’s not bad to carry long-term capital debt. But there is something gallingly stupid about carrying it on deferred maintenance. Part of this debt problem was getting the system back to the state of (more or less?) good repair it is in today was put on the credit card. Oversimplified a bit, costs that should have been operating costs in the 1950s became capital costs in the 1980s, and now the bill is coming due in the 2010s.

            • Larry Littlefield says:

              I wasn’t kidding. A capital investment is a one-time expense that can lead to higher revenues or lower costs. The Second Avenue Subway and East Side Access qualify. Ongoing normal replacement does not qualify.

              “Part of this debt problem was getting the system back to the state of (more or less?) good repair it is in today was put on the credit card. Oversimplified a bit, costs that should have been operating costs in the 1950s became capital costs in the 1980s, and now the bill is coming due in the 2010s.”

              True, except that ongoing normal replacement was never accelerated to make up for the spending that did not occur. We just lived with the consequences of a deteriorated system until a more leisurely rate of replacement caught up. One exception would be the 1980s car overhaul program.

              And the real deferred maintenance took place in the 1970s, the era that we are gearing up to repeat thanks to Generation Greed.

        • pete says:

          Dont worry, inflation with fixed interest rates on those bonds will make them pennies on the dollar when the next generation has to pay for the debt.

      • Aaron says:

        It’s already the right’s clarion call, who are hoping to use it to kneecap every labor union that they can set their sights on. I don’t see any serious progressive pursuing this as an option, not when it would take the states out of the bond market, or at best cause borrowing costs to skyrocket.

    • Marc Shepherd says:

      Bankruptcy. Stiff some affluent bondholders….

      The main problem with your theory is that bondholders aren’t necessarily affluent. A lot of them are held by pension funds, mutual funds, etc., that are in turn held by ordinary folks. Heck, I would bet that you own them yourself, indirectly, without even realizing it.

      A second issue is that you need to be damned sure you’ll never need to borrow money again (hint: unlikely), since a default makes the borrowing costs next time dramatically higher.

      • Larry Littlefield says:

        Municipal bonds are generally held by affluent retirees, because they have lower interest rates but are triple tax free.

        The non-affluent prefer taxable bonds with higher rates, because their tax rates are lower. Same with institutions such as pension funds and insurance, because personal taxes don’t affect them.

        Mutual funds with munis tend to have just munis, in fact just munis from one state, to pass on the tax break to their holders.

        And no, I don’t have ANY municipal bonds in my savings. And that is not an accident.

      • Chris says:

        You also run the risk that the court will refuse to reduce the debt burden or force union concessions, and instead press you to increase revenues to cover your debt. Of the three sets of stakeholders – bondholders, workers, and riders – it’s pretty clear that the riders are the ones getting something for nothing. While debtors hold a lot of cards in a Chapter 9, they cannot just dictate terms, and the MTA would have an especially tough road to hoe given its obvious solvency.

    • petey says:

      “Stiff some affluent bondholders”

      just like to point out that not all bondholders are affluent. my mum is only one of many thousands of elderly who rely on the security of municipal bond (inc. MTA) incomes. likely most muni holders are institutions (i don’t know the percentage of institutional holders v. individual holders) but i’m not keen to advocate pulling the rug out from under 90-somethings living on less than 30K/year.

      • Eric F. says:

        The definition of “affluent” is elastic enough to encompass any group needed to be dunned to support government. No matter where you are on the income pyramid there’s always somebody worse off than you who can be made incensed at your relatively better circumstances.

    • Nathanael says:

      Please get a clue about taxation. Nobody seems to know this stuff, but people should.

      The income which is taxed very differently from everything else is not Social Security or retirement income.

      It’s investment income.

      First $20,000 or so (I forget exactly how much) — federal tax rate 0%.
      After that — federal tax rate 15%.

      No payroll tax.

      Contrast earned income, wages and salaries. Payroll tax which is at least 15%, and then federal income tax which is at least 15%, and that’s on the first dollar….

      I don’t see why trust fund babies should get giant tax breaks.

      • Larry Littlefield says:

        Here is the clue.

        New York State is owned and operated by senior citizens and public employee unions. So Social Security is not taxed, private sector pensions/401Ks are taxed less, and public employee pensions are not taxed at all.

        The federal goverment is owned and operated by senior citizens, the rich, and corporations. Which explains the patterns you describe at the FEDERAL level.

        The payroll tax works for both groups, for the reasons I described.

  3. Eric F. says:

    The idea of taxing wages for the MYA is perverse. Taxes are a disincentive to do whatever it is you are taxing. This tax disincentivizes employment. It’s also a sneaky tax, because the worker doesn’t see a line item on her paycheck to the effect that the MTA just took x% of her take home pay. Instead the tax falls on the employer and manifests itself in lower wage rates. Of course, politicians know that the sneaky taxes can be the least unpopular, otherwise they’d just have imposed a corresponding flat income tax instead of this sleight of hand.

    Your argument:

    “If the MTA were to, say, cut back service on the LIRR, everyone – and not just those who commute to the city – would lose. Property values would plummet, and the economy on the Island would be in tatters.”

    is beside the point. This addresses a need for revenue, but does not recommend this source for it. And then, ironically, the LIRR is less subsidized than the subway/bus system anyway. Finally, if the LIRR were to cut, as opposed to increase fares on wealthy commuters to cover costs, it would likely do so on weekends and off peak times that would not lead to calamity. Why someone making 100k can’t pay the full fare to go from Port Wash to Penn is beyond me anyway. Not sure what’s so “progressive” about subsidizing that commute.

    • Marc Shepherd says:

      But don’t forget, the reason we have the payroll tax is because the legislature rejected better ways of funding the MTA. This is a mess of their own creation.

      • Eric F. says:

        Ok, but they settled on what is literally just about the worst possible way to get their $1.4 billion. There is no reason why one couldn’t advocate for a replacement source.

    • Alon Levy says:

      Eric, the LIRR is actually more subsidized than the rest of the MTA. Its farebox recovery ratio is lower than that of NYCT and Metro-North – about 26% vs. 40%.

      The progressive bit about the LIRR isn’t that it’s subsidizing anyone’s commute. It isn’t; fares are already higher than on less subsidized systems abroad. Instead, it’s subsidizing ticket-punching conductors, a steam-era dispatching system, and FRA-compliant rolling stock maintenance staff.

      • Eric F. says:

        I had no idea! I always thought it was the opposite. That’s especially amazing considering how high the fares are. Woodside to Bayside is $8 one way!

        • Alon Levy says:

          Yeah, I’m not sure that is, either. I’d have thought the LIRR is more efficient than Metro-North. (Fare-wise, Metro-North is almost as expensive as the LIRR. Manhattan to the Bronx is $7.50 one-way.)

        • Bolwerk says:

          Once you start looking at actual finances, rather than what people suppose or read in the paper, you run into some surprises. You can see a lot of interesting financial/operating data about them summarized here:

          – MNRR [PDF]
          – LIRR [PDF]

          That and more available on http://www.ntdprogram.gov/

      • Bolwerk says:

        Obviously MNRR seems like a much more well-oiled operation, but isn’t it also stuck with the FRA-compliant rolling stock maintenance staff*?

        * which it can’t share with LIRR….

        • Alon Levy says:

          Yeah, it does. I guess it just does it better. Hell, NJT has a farebox operating ratio of 67%, same as the subway (which is not the same as NYCT) – apples-to-apples, Metro-North’s is 55% the LIRR’s is 40%.

          Bear in mind that all of those should be compared with similar systems in the non-US first world cities the same size as New York – i.e. Seoul, Osaka, and Tokyo. In those cities, the farebox recovery hovers around 100-110%, and that’s including interest, which American numbers never do.

          • Bolwerk says:

            I thought standard (prevailing?) practice was to not count interest on finance terms exceeding a year as “operating.” If I’m not mistaken, many in public sector RR operations seem to regard what you call “farebox operating” as “farebox recovery,” at least in the USA. (Not that your distinction doesn’t make sense, because it does.)

            I really need to know more before I take a comparison between NYCTA and NJT too seriously. If x recovers 80% and y recovers 40%, x could still be receiving the bigger subsidy because x’s real total cost could be significantly higher than y’s. In NJT’s case, significantly higher fares and less frequent service are garnering fractional cost recovery on what should be (in a world without stupid politicians) an operation that can pay for itself. NYCTA, OTOH, can be expected to run more empty trains at higher frequency.

            • Alon Levy says:

              I believe the standard practice in the US and Europe is to compute farebox recovery ratio (inc. depreciation, ex. interest) and farebox operating ratio (ex. depreciation), and to treat farebox operating as the headline number. In Japan, they do include interest, according to the terms given, which may still be more favorable than the market rate if the government provides low- or zero-interest loans.

              You’re of course right that the important metric for a chronically money-losing agency is subsidy per rider, not just farebox recovery. That makes longer-distance services (i.e. commuter rail) look worse and shorter-distance services (i.e. urban buses and rail) look better. Regardless, farebox recovery is a useful way to compare operations within the same mode, i.e. NJT/LIRR/Metro-North.

              • Bolwerk says:

                Hmm, I’m not seeing that anywhere definitively. Going by my faulty memory of this stuff from an MBA I never used, I seem to recall depreciation should always be regarded as an operating cost, so I find it curious that it would be excluded from any operating cost measure. I’ve seen that Amtrak actually publishes separate numbers counting and not counting depreciation on its routes (and of course Amtrak does pretty well without depreciation!).

                • Alon Levy says:

                  For a business, you’re right – depreciation is an operating cost for tax purposes. For a government agency, it’s different. I don’t know if they’re doing it to make their numbers look better or if it’s to essentially treat operating and capital costs separately.

  4. Larry Littlefield says:

    One more point: who doesn’t pay the payroll tax?

    The very rich who take their income in capital gains.

    The retired.

    Public employees, whose wages are set in stone by contract and cannot have the cost of the tax shifted to them.

    All the people who have been making out at the expense of working Joes and Janes for the past 20 years.

    • Nathanael says:

      Oh, glad you DO know about the cap. gains and dividends tax breaks.

      That’s what should be fixed — that’s also where the real money is.

      Of course, just try to get the CEO-controlled Congress and President to tax the very rich like everyone else. Their first priority seems to be protecting the very rich. Otherwise the Bush tax cuts would have been repealed.

  5. Chris says:

    I admit it’s not clear why Walder thinks the MTA can’t raise fares 33%. This would be politically unpalatable (for officials who need to get elected) but certainly possible, almost certainly revenue enhancing, and probably more desirable than service cuts for many users.

    • nycpat says:

      Exactly. You can’t stiff bond holders or workers without raising fares first.
      Since the greatest beneficiaries of tansit are the owners of commercial real estate in an ideal world transit would be funded by real estate taxes and user fees. Not volatile transfer taxes or payroll.

    • DMIJohn says:

      Why? Median household income in Brooklyn: $42,000. In the Bronx: $33,000.

      • Chris says:

        That’s about political feasibility though, which the MTA isn’t exposed to directly. The MTA has no absolute mandate to remain affordable to the poorest NYC residents. If it’s forced to raise fares, it can just do so and let the representatives deal with the fallout when people have to choose between eating dinner and a MetroCard.

        I just wanted to make the distinction that this payroll tax is not something the MTA needs to survive as a transit agency. It may be needed if the MTA is to survive as an affordable means of mobility for the poorer segment of the population, but that’s a separable issue.

      • nycpat says:

        And real estate in NYC is worth what? A trillion+$? You just can’t throw out contracts because to fulfill them is politically inconvenient.

        • pete says:

          And real estate in NYC is worth what? A trillion+$? You just can’t throw out contracts because to fulfill them is politically inconvenient.
          Thats capitalism. If you dont want financial risk in life, move to the Soviet Union, where your job and pension are guaranteed for life.

          • nycpat says:

            No thats anarchy. That’s banana republic kleptocracy. Capitalism depends on regulated markets, such as we have with a court system that enforces contracts and laws.
            If the bond holders don’t get paid, if the pensions don’t get paid it’s over; we’re Haiti.

            • Nathanael says:

              We’re pretty damn close to banana republic status already with courts not enforcing the laws, giving favorable treatment to the most powerful and the largest corporations (look up the Florida “rocket docket”). We must try to reverse this trend.

          • Donald says:

            Throwing out contracts simply because you don’t want to fulfill them anymore is certainly not capitalism or anything close to it. Without the security offered by contracts, business would come to a halt. Nobody would buy anything. Your landlord can raise your rent in the middle of the lease. Your bank can double your interest rate on a fixed rate mortgage.

            • Nathanael says:

              Banks actually do approximately that, by charging people with mortgages “fees” which they are prohibited by law and contract from charging. It’s called “fee fraud”. It’s frighteningly common among the big banks, and they routinely get away with it.

              This country is in very deep trouble.

  6. JAzumah says:

    Congestion pricing’s implementation will lead to a reduction in MTA dollars. It will only pass with a reduction of the RMT (payroll tax). How does the MTA replace 20-25% of $1.4B? Fare hikes.

    • Donald says:

      And draconian service cuts.

      • Chris says:

        Yeah that’s what I’m always most worried about. Ultimately for the MTA, fee hikes are not the end of the world because the services provided are generally well worth a much higher fare. Wages would probably creep up over time in areas where employers are benefiting heavily from transit. Service cuts, on the other hand, move service in the wrong direction and do little to right the ship long term since there’s usually the expectation that service will be resumed again at some point in the future when finances are more secure.

Trackbacks/Pingbacks

  1. […] via The pesky political economics of the payroll tax :: Second Ave. Sagas. […]

  2. […] the state legislature approved the controversial plan. But this is a point oft repeated that Albany doesn’t seem to understand. Three weeks after the Senate performed a similar farce, the Assembly went at it. “We are paying […]

  3. […] this road to repeal can be a dangerous one for New York and the MTA. As Jay Walder said a few weeks ago, “It would be impossible for the MTA to replace $1.4 billion.” Zeldin and those who support […]

Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>